Looking at balanced funds over banks fixed deposits: What you should know

Those who are in need of regular income should shift their money to short-term debt funds and do systematic withdrawals from them

Not just equity funds, even balanced funds have seen huge participation from investors over the past one year as equity markets touched new highs. Data from the Association of Mutual Funds in India (Amfi) shows that in calendar year 2017 balanced funds saw net inflows of over Rs 840 billion.

The mutual fund industry says that balanced funds are a gateway for first-time investors into the world of equity. But retail investors have also got attracted towards these funds because fund houses have been providing dividends on a regular basis.

Balanced funds are a route for new investors to get a taste of equities. Since they have a debt component of around 30-35 per cent, investors get some protection. But now many asset management companies (AMCs) are pushing the dividend option of balanced funds, especially for new investors who are moving from bank fixed deposits (FDs) to mutual funds for the first time. "Balanced funds are pitched as an income option by way of a regular dividend. I do not think it is right to do so," says Vidya Bala, head-mutual fund research at FundsIndia.

Apart from the attraction of dividends, the surge in investments into balanced funds was also due to the declining returns in traditional fixed-income products. A lot of the money that used to stay in FDs and other fixed-income instruments has come into balanced funds as returns from traditional debt products have come down dramatically. "The two product classes are not comparable, as balanced funds have a certain level of risk. But there has been a clear shift of money from fixed-income instruments to equity-oriented instruments purely because of the returns," says Suresh Sadagopan, founder, Ladder7 Financial Advisors.

Returns over the past year
	1-year	3-year	5-year	10-year
Minimum	6.86	5.42	7.40	-2.36
Maximum	48.78	16.10	18.60	14.25
Average	22.95	10.54	15.13	8.76
Figures in percentages. Source: Ace MF

Over the past one year, balanced funds have given an average return of 22.95 per cent (source: Ace MF). These funds are also tax efficient. Any fund that invests more than 65 per cent money in stocks is treated as an equity fund for taxation purpose. Balanced funds keep at least 65 per cent of their money in equities. Long-term gains from equity funds are not taxed. The advantage investors get in balanced funds is that even the debt portion of these funds gets equity-like treatment.

Despite the equity markets touching new highs, fund houses believes that this category will continue to grow. "Balanced funds have many advantages like automatic rebalancing, and a track record of having delivered decent returns over a longer time horizon. With all these factors, I think the momentum should continue in balanced funds," says Neelesh Surana, chief investment officer (CIO)-equity at Mirae Asset Global Investments (India). 

Analysts warn that investors should not blindly invest in balanced funds just for dividends as equity funds are under no obligation to pay dividends regularly. In case the markets correct, it will become difficult for fund houses to deliver regular dividend. This factor should be kept in mind before entering balanced funds. If investors are looking for regular income, they should put money into short-term debt plans and do systematic withdrawal plan (SWP) as that is way in which one can get regular returns.